Notice: To view this week’s big picture outlook, click here.
Key Takeaways For Today:
- $3,900.00 S&P 500 is sticky, so expect balance.
- The longer-term bias remains up until it is not.
- Hedge bets when you can, not when you have to.
What Happened: Overnight, U.S. stock index futures auctioned higher, ahead of economic releases on U.S. business activity.
What Does It Mean: The past few weeks have been volatile.
Market participants witnessed a rapid de-risking event, as a result of individual stock volatility, and a subsequent v-pattern recovery, that was later taken back as the February monthly options expiration (OPEX) neared.
Given OPEX, participants have a clue as to why the market has failed to resolve directionally: option expiries mark an end to pinning (i.e, the theory that market makers and institutions short options move stocks to the point where the greatest dollar value of contracts will expire worthless) and the reduction dealer gamma exposure.
Aside from OPEX, we must talk more on the aforementioned v-pattern recovery and last week’s spike exit from balance, as well as weakening broad market volatility.
More On The V-Pattern: A pattern that forms after a market establishes a high, retests some support, and then breaks above said high. In most cases, this pattern portends continuation. More On Spikes: Spike’s mark the beginning of a break from value. Spikes higher (lower) are validated by trade at or above (below) the spike base (i.e., the origin of the spike).
In light of the v-pattern, balance, and spike, the S&P 500’s long-term uptrend remains intact. In support of this uptrend, systematic and hedge fund participants are increasing their long-exposure, given the economic recovery, and a drop in volatility.
Beyond that, speculative activity in the options market and measures of market liquidity fail in offering much information.
SPY Market Liquidity 
QQQ Market Liquidity 
IWM Market Liquidity
What To Expect: Friday’s regular session (9:30 AM – 4:00 PM ET) will likely open outside of prior-balance and -range, suggesting the potential for immediate directional opportunity.
This comes alongside the acceptance of higher prices (above a prominent high-volume area), and an overnight rally-high at $3,959.25.
More On Overnight Rally Highs: Typically, there is a low historical probability associated with overnight rally-highs ending the upside discovery process. More On Volume Areas: A structurally sound market will build on past areas of high-volume. Should the market trend for long periods of time, it will lack sound structure (identified as a low-volume area which denotes directional conviction and ought to offer support on any test). If participants were to auction and find acceptance into areas of prior low-volume, then future discovery ought to be volatile and quick as participants look to areas of high-volume for favorable entry or exit.
Given the above dynamics, the following frameworks ought to be applied.
In the best case, as stated yesterday, the S&P 500 opens and remains above the $3,900.00 confluence zone. Auctioning beneath $3,900.00 turns the high-volume area (HVNode) nearby into supply, offering initiative sellers favorable entry and responsive buyers favorable exit.
Levels Of Interest: $3,900.00 HVNode.
Physik Invest 